Hawkish cenbanks send leveraged loans to highest since 2007

A view of the Federal Reserve Building in Washington, September 16, 2008. REUTERS/Jim YOUNG/File Photo

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  • US leveraged loan prices hit highest level since 2007
  • Upcoming rate hikes strengthen the case for floating rate assets
  • Loan inflows recently hit their highest level since 2013 – Refinitiv Lipper

Jan 20 (Reuters) – The prices of leveraged loans in the United States have risen to their highest levels since 2007 as investors snap up assets offering compensation as central banks begin to hike interest rates. interest.

Leveraged loans are often taken out by highly indebted companies, usually with lower quality credit ratings, and are often used by private equity firms to finance their acquisitions of these companies.

Unlike bonds, they pay a floating interest rate, which rises as underlying interest rates rise, making them attractive to investors at a time when central banks are embarking on rate hikes. .

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The US Federal Reserve is expected to hike rates as early as March to tackle inflation at its highest level in 40 years and markets are pricing in three more hikes by the end of the year.

This has increased demand for assets that pay as rates rise, sending the price of the S&P/LSTA Leveraged Loan Index to its highest level since July 2007 at 99.066 at Wednesday’s close, according to data from Refinitiv and S&P Global’s Leveraged Commentary and Data.

“There’s the expectation of rate increases, which inevitably pushes more retail money into the asset class,” said Neha Khoda, credit strategist at BofA in New York.

“Given the selloff we’ve seen in the rates market, this has led to an increase in retail inflows into U.S. loan mutual funds.”

Lending funds saw the highest inflows since 2013 at $1.84 billion for the week ending Jan. 12, according to data from Refinitiv Lipper.

Leveraged loans at their highest since 2007

Government bond prices have fallen and yields have jumped over the past month as markets stepped up bets on higher rates.

Analysts also expect new issuance of leveraged loans to slow slightly this year after a record year in 2021, a factor that should also provide technical support for prices.

The rally in leveraged loans contrasts with US high-yield bonds – often sold by similar companies – which are down about 1% this year, according to BofA. High yield debt pays fixed coupons and is therefore more vulnerable to rising rates.

Leveraged loans have outperformed junk bonds – often issued by similar borrowers – on an annual basis in only eight of the past 26 years and some of those years have involved some level of policy tightening. Fed, according to research firm CreditSights.

After peaking in 2007, leveraged loan prices fell sharply at the onset of the financial crisis.

A subsequent era of low interest rates has pushed investors to seek higher yielding assets in recent years, ultimately leading to an increase in demand for leveraged assets and a deterioration of protections known as covenants. restrictions that give lenders additional control over what borrowers can and cannot do.

“The point to understand about the loan market is that it’s not the same market as it was before the GFC (global financial crisis),” Khoda said. “Documentation is worse, rating quality is worse, issuer composition is worse.”

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Reporting by Yoruk Bahceli; Editing by Saikat Chatterjee and Andrew Cawthorne

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